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The federal government has surprised Canadian workers and employers by cancelling hikes to EI contributions planned for the next three years.

Finance Minister Jim Flaherty made the announcement on Monday in Ottawa, arguing that the Canadian economy has seen a steady recovery, with more Canadians returning to work and fewer unemployed workers claiming jobless benefits.

Flaherty said Ottawa could afford the $660 million hit, arguing that the tax relief will help support the country’s economic recovery.

For individuals, however, the impact of the freeze won’t be huge. The planned increase was 5 cents a year on every $100 in insurable earnings; for a worker earning $48,600, the maximum threshold in 2014, it would mean $24 in savings. For a small business with 10 workers, it would represent a savings of up to $340.

Business groups were quick to praise the move, with Canadian Federation of Independent Business president Dan Kelly on hand at the announcement, calling the freeze on payroll taxes “fantastic news.”

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He argued that while the individual hikes from year to year are modest, they are cumulative for businesses. “It could impede your ability to hire or to train or offer a good wage increase,” Kelly said in an interview. “It gives businesses the ability to plan.”

But labour groups were quick to denounce the move, saying unemployed workers lose out, as do underemployed workers, who cobble together part-time or contract work, making it difficult to qualify for employment insurance in the first place.

“I’d rather have the money in the fund. It was supposed to be insurance for a crisis,” said Cammie Peirce, a national representative with Unifor, the newly formed union created by the merger of the CAW and CEP. “They should use the money for the people, instead of squeezing people out of it.”

United Steelworkers economist Erin Weir said the big winners are the businesses who pay higher premiums, and estimated almost $400 million will go to their pockets. “The losers are the unemployed Canadians who are left out. There will be less money to fund EI benefits,” Weir said.

In a news release, Weir said while there has been only a “slight reduction” in the number of unemployed, there is a big increase in the number who have been cut off from EI benefits.

Weir cited recent EI figures showing the number of jobless who received EI benefits dropped from 709,990 in September 2010 to 512,280 in June 2013.

At the news conference, Flaherty brushed aside questions about government reforms that tightened eligibility rules for jobless benefits.

Flaherty said that the Conservatives’ EI reforms were necessary to encourage economic growth, which in turn created the job growth charted since July 2009.

With more workers paying into the EI plan, Flaherty said the operating account is expected to return to balance earlier than planned, and “the premium rate increases previously projected are no longer necessary.”

The EI premium rate for employees will remain at the 2013 level of $1.88 per $100 of insurable earnings for 2014, and remain at that level for 2015 and 2016. Employers pay about 1.4 times the employee rate, or about $2.63 per $100 of insurable earnings (but can reduce that amount if certain other benefits are paid).

BMO chief economist Douglas Porter called the move “modestly good news,” noting that Ottawa has promised to freeze the 2014 rates and cap the rates for 2015 and 2016. “There is quietly a potential for them to fall,” he said.

“We have managed to avoid what is effectively a tax hike,” he said. “But don’t get too excited.”

Peter Dungan, an associate professor of economics at the Rotman School of Management, agreed that the amount of savings for individuals was small, so there wouldn’t be a sudden surge of spending in the economy.

“It’s not like it will have a huge stimulative effect. It’s not a huge amount of money,” he said.

However, he also credited the federal government with taking a longer-term view, given that EI premiums were forecast to decrease in a few years. He believes it’s better policy not to hike rates now when cuts are anticipated down the road, thereby avoiding dramatic swings in premium rates.

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